Sovereign International Daily Market Report
Stubborn US inflation data eases chances of early Fed cut
Highlights:
The dollar edged modestly higher against its peers on Tuesday, as the February US inflation report provided FOMC members with further grounds to hold off from lowering rates until at least its June meeting.
Both the headline and core measures of inflation beat expectations yesterday. The former ticked back up by 0.1 p.p to 3.2%, above the 3.1% consensus. The latter, meanwhile, eased to a near three-year low, although also came in above economists’ estimates (3.2% vs. 3.1% expected). Perhaps the most alarming aspect of the report is the stubbornness evident in the monthly core number, which unexpectedly remained stuck at 0.4%, while the 3-month annualised core rate increased again and now stands at a nine-month high of 4.2%.
Following the data, futures markets continue to see practically no chance of a first interest rate cut at either of the Fed’s March or May meetings, which we agree appear far too soon. We view the June FOMC meeting as the likely start date to easing, although the hawks in the committee will likely argue over the stickiness in the core sub-indices, while warning that elevated wage growth still presents an upside risk to consumer prices. For now, however, investors continue to see a more than 80% implied probability of a June cut. This is little changed relative to pre-CPI data levels, and the rally witnessed in the dollar was, therefore, relatively minimal.
UK wage pressures continue to abate
The GBP/USD pair was dealt a double whammy on Tuesday, as yesterday morning’s UK labour report also fell short of expectations. The January unemployment rate unexpectedly rose to 3.9% (from 3.8%), while earnings growth slowed modestly on an annual basis. Average earnings growth including bonuses eased to 5.6% year-on-year in the three months to January (from 5.8%), its lowest level since July 2022, while the measure excluding bonuses also dropped to 6.1% (from 6.2%).
Sterling sold-off modestly on the news, as investors perceived the decline in wage pressures as a signal that the Bank of England could begin lowering interest rates in the not-too-distant future. MPC members are unlikely to have greeted the news with rapturous celebration, however, as these levels remain far too high for the bank to have any semblance of confidence in it achieving its price mandate. Attention now turns firmly to this morning’s GDP report for January. Modest expansion in the vicinity of around 0.2% MoM is expected, which would likely alleviate concerns that last year’s technical recession could spill over into Q1.
Across the channel, the January industrial production report will be closely watched today. Economists are eyeing a 1.5% drop in industrial output, following the 2.6% contraction in December. Looking ahead, Thursday’s US retail sales report could be important for the dollar this week, as investors attempt to gauge the strength of the US consumer. A solid rebound in sales around the +0.8% level is seen.
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